Market starts to slowdown as we reach the year end and restrictions start to take hold

13 December 2016

“November data indicates that the market has started to slow towards the end of the years partly in response to recent government efforts to control price growth in the residential and land markets.” said James Macdonald, Director of China Research

National real estate data for the first eleven months of 2016 was released on December 13, 2016.

Real estate investment stood at RMB9.34 trillion in the first eleven months, up 6.5% year-on-year (YoY) but down from the 6.6% recorded in the first ten months of the year. Furthermore, total land sales decreased 4.3% year-on-year (YoY) during the same period, from 199 million sq m to 190 million sq m. However, the total land sales consideration increased 21.4% to RMB778 billion, indicating that the average price of land sold increased by 26.8% to RMB4,083 per sq m. New starts growth slowed to 7.6% YoY, with 1,513 million sq m under way.

Volume of space completed increased 6.4% YoY to 770 million sq m. There is currently 7.45 billion sq m under construction, up from 7.24 billion sq m the year before. The volume of space sold jumped to 1.36 billion sq m by November 2016, up from 1.09 billion sq m the previous year, while the average price paid increased 10.6% YoY to RMB7,546 per sq m. The combined effect of these two indicators means the total consideration paid increased 37.5%, to RMB10.25 trillion.

OutlookDespite a slight improvement in the growth rates of many of the key indicators in September, which carried through into October, year-to-date (YTD) growth rates started to decelerate in November. This is most likely a result of the tough restrictions put in place in many of the of the first and second tier cities over the last three months, as well as the recent clampdown on excessive accommodation vales at land auctions. With the added pressure of more stringent enforcement of existing regulations, including greater due diligence of fund sources for down payments on both land auctions and home purchases, it is no wonder that the market began to slow towards the end of the year, especially as the base of comparison, i.e. 2015 year end, was relatively high.

Given the recent momentum of the market and the noise coming from the central government, it looks like the property market could once again be entering a phase of slower growth or even contraction on the basis of some indicators. Tighter lending and financing conditions combined with record high prices and slower economic growth should temper the appetite of more seasoned developers. These developers will once again bide their time until the direction of the market is better understood, looking to make more strategic investments should pricing come down a little more. Other players may focus more on extracting the full value out of the assets that they have on hand or by diversifying their business operations into adjacent industries that have synergies with their existing business. Some still will focus on reducing the cost of their debt or their overall gearing ratios.